In re Trust of Ray D. Post, No. A-0929-16T1, 2018 WL 3862756 (N.J. Super. Ct. App. Div. Aug. 15, 2018)

In re Trust of Ray D. Post, No. A-0929-16T1, 2018 WL 3862756 (N.J. Super. Ct. App. Div. Aug. 15, 2018).

Plaintiff Valley National Bank (“VNB”) filed an application for approval of a formal accounting. The remainder beneficiaries objected, complaining inter alia that the plaintiff violated the terms of the trust by diversifying the trust portfolio in violation of the language of the trust.

The trust was a two-page document created in 1975. The grantor specifically provided that the trustee was to retain the assets deposited into the trust, free of any liability for such retention.  The income from the trust was payable to the grantor for his lifetime, then to the grantor’s wife.  On the death of the grantor’s wife, the remainder was to be paid to the grantor’s two granddaughters.

The grantor predeceased his wife, who lived until 2008. Meanwhile, the original trustee was acquired by VNB in 1993.  In or about May 2000, VNB became concerned that the trust assets were not properly diversified.  As a result, the bank had the matter reviewed by counsel, who advised that the bank had four options:  do nothing if it was satisfied that the trust assets were acceptable; diversify the portfolio; notify the beneficiaries and seek consent to diversification; and seek court approval of the decision to diversify.

VNB chose to simply diversify. The evidence at trial indicated that the bank never explicitly notified the beneficiaries that it had chosen to disregard the specific instructions of the trust and diversify the portfolio.  A few months after his initial letter, in an unsolicited follow-up letter, the bank’s attorney advised that, based on a recent judicial decision, VNB should seek instruction from the court before diversifying or else it “was acting at its own peril.”   VNB never did so and continued to diversify.

The bank’s defense was that the Prudent Investor Act supersedes a grantor’s express direction in a trust regarding investments. The trial court rejected that argument based on the plain language of the statute.  The bank’s secondary argument was that the remainder beneficiaries were estopped from objecting because they knew or should have known of the bank’s actions, despite the fact that the VNB never expressly notified the beneficiaries of its course of action.  This argument was based on the fact that the beneficiaries began receiving statements prior to the diversification, which began in the year 2000, and, according to the bank, had full knowledge of the terms of the trust at that time.

The trial court held that the bank violated its fiduciary duty by disregarding the terms of the trust and failing to obtain either the consent of the beneficiaries or judicial approval for its actions.   It accepted in part, however, the bank’s equitable defense, finding that since the bank sent the trust in 2008 to the beneficiaries, and since the beneficiaries had been receiving statements prior to that time regarding the trust investments, the beneficiaries should have objected in 2008 and thus their damages were measured from that date.

The trial court determined that, had the bank followed the grantor’s directions and retained the assets, the value of the trust portfolio in 2008 would have been $520,000.00 more than the value of the actual diversified portfolio. Therefore, the trial court entered judgment against the bank and in favor of the beneficiaries, in the amount of $520,000.00, plus pre-judgment interest.  The  court disallowed commissions to the bank after May 2008, finding that it had stopped managing the assets as of the date of death of the income beneficiary.  The Appellate Division affirmed in all respects.